Small Business

To PEO or Not to PEO

May 20, 2002

By Bret Lamperes In the moving industry, workers compensation is a huge expense -- try hauling pianos up and down stairs every day and you'll understand why. A little harder to comprehend, at least at first glance, are professional employer organization (PEO). What these operations do is put your workers on the books of the PEO, which leases them back to you and, at least in theory, eliminates the headaches of workers compensation, withholding payroll taxes, and cutting pay checks. I have dealt with state workers compensation, private workers compensation, a good PEO, and a not-so-good one, so I can speak with the benefit of experience.

I gained this knowledge the hard way, when one PEO with which I had been working went out of business and left me hanging. That was when I set out to research the subject in depth. As it happens, my business remains with a PEO because, by my reckoning, the positives continue to outweigh the negatives. I spoke with Doug Clear, co-owner of Resource Management Systems in Golden, Colo., about what to consider when making a choice. He made three vital points, the first of them a question:

Is the PEO self-insured? "If it is getting its insurance coverage on the open market," says Clear, the day may come when "their policy could be in jeopardy of not being renewed." That would leave you out in the cold.

Make sure the outfit's current clients are happy with the follow-up services. If they're grumbling, chances are you will end up complaining, too.

Your PEO should be backing measures to encourage workplace safety and help reduce injury claims.

That's Clear's advice. Now, here's mine -- a compilation of advantages, disadvantages, and things to consider when choosing whether or not to go with a PEO. First, the advantages:

It saves money: You can probably get a better rate on workers compensation through a PEO because the policies they offer often feature high deductibles and multiple categories. As a rule, they tend to handle claims efficiently and put a lot of effort into rooting out fraudulent claims that can end up costing big bucks.

Legal Advice: You now have a place to turn when seeking straight answers to tough questions about employees. The PEOs I have worked with helped with guidance concerning terminations, as well as my obligations to comply with employment and workplace laws and regulations that seem to change every year.

Paperwork killer: Background checks and other hiring services are usually done through the PEO, which saves time, expense, and trouble.

Basket of benefits: You can secure all your employee benefits at the same time, from general health insurance to dental coverage and retirement plans.

Taxes: Once you have signed on with a PEO, there will no longer be a need to collect, process, and forward your workers' FICA, SUTA, or FUTA payments. The PEO is responsible.

Now, for the disadvantages:

Non-renewal: As I discovered, a PEO can drop your "risk category" and leave you scrambling to secure workers-compensation from another source. This brings me to my next point.

Loosing your rating: Workers compensation payments are worked out, in part, according to what's know as a "modifier." Maintain a good safety record and keep claims to a minimum, and you can expect to pay less. If your PEO doesn't work out, however, and you are forced to seek coverage from a private insurer or the state, be prepared for bad news: Since the modifier is calculated over a three-year period, you will most likely have to start at the base rate and lose the savings from the safety gains you have made.

Cash flow: Your days of playing cash-flow games and delaying payments will be over. If you have been in the habit of passing along taxes the week after payroll and strategically planning when you make insurance payments, you'll have to change your ways. A PEO will want you to pay upfront and in full.

Bottom line: Make sure the company has a strong financial position. Some PEOs are hanging on by a thread.

Loss of control: The person you want to hire might not be the one the PEO feels comfortable with. This is a hard one, if you have to pass up a job-seeker you feel is perfect. On the other hand, it can also engender good, sound business decisions. You may have an excuse, for example, to reject the stoned-out son of a friend who has been leaning on you to give his pride and joy a paying job!

Shipping costs: You will probably be charged for the cost of getting those pay envelopes to your place of business.

PEOs are not for every business. Despite the ups and downs, I stayed with one because the numbers worked and I was tired of paying a 25% deposit on my outfit's workers compensation policy. So take a leaf from my book: Collect information, compare what's on offer, and decide based on your own situation. It's an approach that worked for me. Bret Lamperes is an entrepreneur in Northern Colorado. He owns Dandelion Moving & Storage, Dandelion Mini-Storage, and DickerABid.com